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Ambuja Cements Ltd. -Not much to cheer
„4Q CY10 results disappoint despite strong efficiency gains
Ambuja’s recurring profit for 4Q CY10 stood at Rs2.5bn, up 5% YoY and 65%
QoQ. EBITDA for the quarter fell 27% YoY but rose 11% QoQ. Margins fell both
YoY and QoQ but seasonal volume recovery boosted QoQ profits. Results were
below our expectations due to lower realizations. Key costs (incl. power & fuel,
freight) stayed flat-to-down QoQ despite the transport strike & rising coal prices.
CY11E cut; earnings to decline YoY; maintain underperform
We have cut CY11E EBITDA by ~14% led primarily by higher costs esp. energy;
Ambuja currently sources ~70% of its coal requirements from open mkt/imports.
We expect the Co’s earnings to decline 9% YoY in CY11E; this coupled with rich
valuations at ~20-25% premium to replacement cost drives our Underperform.
Cement prices rise in north & west, but unlikely to sustain
Our dealer checks indicate that cement prices in north & west India are up sharply
in Jan ’11 vs 4Q CY10 levels. We think such price hikes reflect rational production
efforts of the industry & are not sustainable. Continued weak demand growth
(reflected in Jan ‘11 despatches) could aggravate woes of already high supply.
New unit planned at Rajasthan; details awaited
Alongwith 4Q results, Ambuja announced that it has signed an agreement for a
new 2.2mn tpa clinkerisation unit at Nagaur in Rajasthan. Details are awaited.
Expectations of ACC-Ambuja merger remain strong
There have been growing market expectations of a merger between Ambuja and
ACC. Holcim’s stake in both entities is similar (48% in ACC & 46% in Ambuja). A
merger could yield synergies in administration and distribution costs but saving in
marketing costs look difficult unless the brands are rolled into a single one.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements Ltd. -Not much to cheer
„4Q CY10 results disappoint despite strong efficiency gains
Ambuja’s recurring profit for 4Q CY10 stood at Rs2.5bn, up 5% YoY and 65%
QoQ. EBITDA for the quarter fell 27% YoY but rose 11% QoQ. Margins fell both
YoY and QoQ but seasonal volume recovery boosted QoQ profits. Results were
below our expectations due to lower realizations. Key costs (incl. power & fuel,
freight) stayed flat-to-down QoQ despite the transport strike & rising coal prices.
CY11E cut; earnings to decline YoY; maintain underperform
We have cut CY11E EBITDA by ~14% led primarily by higher costs esp. energy;
Ambuja currently sources ~70% of its coal requirements from open mkt/imports.
We expect the Co’s earnings to decline 9% YoY in CY11E; this coupled with rich
valuations at ~20-25% premium to replacement cost drives our Underperform.
Cement prices rise in north & west, but unlikely to sustain
Our dealer checks indicate that cement prices in north & west India are up sharply
in Jan ’11 vs 4Q CY10 levels. We think such price hikes reflect rational production
efforts of the industry & are not sustainable. Continued weak demand growth
(reflected in Jan ‘11 despatches) could aggravate woes of already high supply.
New unit planned at Rajasthan; details awaited
Alongwith 4Q results, Ambuja announced that it has signed an agreement for a
new 2.2mn tpa clinkerisation unit at Nagaur in Rajasthan. Details are awaited.
Expectations of ACC-Ambuja merger remain strong
There have been growing market expectations of a merger between Ambuja and
ACC. Holcim’s stake in both entities is similar (48% in ACC & 46% in Ambuja). A
merger could yield synergies in administration and distribution costs but saving in
marketing costs look difficult unless the brands are rolled into a single one.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
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